Why the Dow Jones Plunged This Morning

The Dow Jones Industrial Average started the day down 180 points as fears rose over Europe's banking system after one of Portugal's largest banks missed a debt payment, sending Portuguese and European stocks sharply lower. As of 1:20 p.m. EDT the Dow was down 79 points to 16,907. The S&P 500 was down seven points to 1,965.

As you might expect, financials are leading the stock market down today, though materials companies are not far behind. The S&P 500's losses are concentrated in those two sectors, while 25 of 30 Dow stocks are in the red.

Source: Finviz.com.

The trouble is being caused by one of Portugal's largest conglomerates, Espirito Santo International, and its publicly traded bank subsidiary Banco Espirito Santo, whose stock dropped 17% today before trading in its shares was halted.

Source: Google Finance.

In January, concerns arose over practices and accounting at the conglomerate and its relationship with the bank. The private conglomerate was using the bank to fund itself by selling debt to the bank's customers and was allegedly misrepresenting its financial condition. An audit was conducted under the direction of the Portuguese central bank, which found accounting irregularities at the conglomerate and determined that the conglomerate was in "serious financial condition."

News came out after the European markets closed yesterday that the conglomerate had delayed payments on some short-term debt that Banco Espirito Santo had sold to its clients. The interrelations between the two companies and the lack of understanding of how bad the situation really is has investors unloading the bank's shares. Investors are also fleeing Portugal Telecom, as it owns an estimated $1.2 billion worth of Espirito Santo debt as well as Portuguese government debt, and it is unclear what effect this will have on the financially struggling government.

U.S. financial companies are selling off in response because they are all exposed to Europe in some capacity. If financial problems spread from Portugal around the European banking system, U.S. banks will take a hit. However, the problems look contained for now, which is why the Dow bounced back from its early sell-off.

What should you do now?Nothing. If your investment strategy can be changed by one European bank's problems, you're doing it wrong. The U.S. economy continues to slowly get stronger, as does the world economy. While stocks and bonds look pricey, your main focus should be to stick to your strategy, constantly educate yourself, find great companies, and invest for the long term.

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